Ohio Supreme Court considers constitutionality of new business tax

COLUMBUS The Ohio Supreme Court on Tuesday weighed in on what could be a nearly $400 million question for the state budget: Does Ohio s new business revenue tax unconstitutionally tax food?

"This court should reject the legislature s attempt to circumvent the constitution and uphold what it has always said, that it is the substance of the tax that matters, not how it is labeled," said Gerhardt A. Gosnell II, attorney for the Ohio Grocers Association.

At issue is Ohio s Commercial Activity Tax, which is levied against the gross receipts that businesses pay, including, in the case of grocers, revenue that is generated from the sale of food. The state argues that the tax is on the privilege of doing business in Ohio and, unlike the sales tax, is paid by the business, not directly by the consumer at the cash register.

At stake is a potential $188 million a year in the state s current $50.5 billion, two-year budget. That does not include hundreds of millions that the state could be forced to refund if the court rules that the tax has been illegally collected over its roughly five-year life.

A five-year tax-reform rollout that is now nearing completion decreased personal income taxes by 21 percent across the board and replaced the loophole-laden Corporate Franchise Tax on business profits and an unpopular tax on business inventory, machinery, equipment, and furniture with the broader, lower-rate CAT on business gross receipts.

"That franchise tax included in some form or fashion, directly or indirectly, how much food they sold, but there was never any objection by the grocers to that tax, was there?..." she asked. "If this CAT tax is found unconstitutional, what do the grocers pay for the privilege of doing business in Ohio?"

"They will continue to pay the Commercial Activity Tax, and they will continue to pay it on gross receipts that aren t exempt by the constitution," said Mr. Gosnell.

"So they don t go back to any other franchise tax from before, but their bill is enormously reduced because the bulk of their profit presumably is the sale of food," said Justice Stratton.

The court did not immediately rule.

On Wednesday, the high court will hear arguments in a separate case challenging the way lawmakers and Gov. Ted Strickland authorized as many as 17,500 slot machines at Ohio s seven horse-racing tracks. That has the potential of taking $933 million more from the budget.

This is on top of a recent decision out of Franklin County Common Pleas Court that prohibited the governor from spending $258 million in tobacco settlement dollars for anything other than the anti-smoking programs for which it had originally been earmarked. That case is also expected to eventually work its way up to the Supreme Court.

The price tag of the CAT case, however, was not before the court.

"That s not our concern. That s not a legal issue," said Chief Justice Thomas Moyer.

Attorney General Richard Cordray, who personally argued the state s case, noted that small mom and pop grocers would save just $150 a year if the court rules in favor of the grocers. The CAT taxes all businesses a flat $150 if their gross receipts are under $1 million.

"Large agribusiness and food-selling corporations would stand to reap millions of dollars in savings apiece," he said. "As to the effect on the consumer, we don t know

"Large portions of an entire industry would be pulled out of the base, and they would pay little or no tax," Mr. Cordray said. "It would have to be made up elsewhere Others will follow with their challenges. They re waiting to see the outcome of this case."